Articles Posted in Non-Compete Agreement / Covenant Not to Compete

In recent years, courts have largely been ruling against employers in cases of disputed non-compete agreements. A non-compete agreement is a provision in an employment agreement which states that the employee, after leaving the employer, will not compete with the employer for business within a certain time frame and a certain geographical radius of the employer. Such provisions are intended to protect the employer but many of them have lately begun to stretch the bounds of what is reasonable, making it increasingly difficult for the employee to find another job.

In one such dispute over a non-compete agreement, John Malyevac signed an employment agreement with Assurance Data, which included a non-compete provision. The provision stated that, after termination with the company, Malyevac would not compete with Assurance Data within a fifty-mile radius of its headquarters for a duration of “twelve (12) [sic] after the date of termination.” After Malyevac left his employment with Assurance Data and went to work for another company, Assurance Data sued Malyevac for alleged breach of employment contract.

Malyevac filed a demurrer to the complaint, saying that it failed to state a claim upon which relief could be granted. A demurrer, also known in most courts as a motion to dismiss, is when the defendant asks the court to dismiss the case based solely on the allegations given in the complaint, rather than the actual facts. Malyevac also claimed that the non-compete agreement was too broad and therefore unenforceable. For example, he pointed out, the provision of prohibiting the employee from soliciting for customers for “twelve (12) [sic] after the date of termination” does not say whether that applies to days, weeks, months, or years. Six to twelve months is a common duration for these types of agreements, but without specifically saying so in the agreement, it would be difficult for a court to uphold.

Assurance Data argued that the court could not decide how enforceable the non-compete agreement is on demurrer, because doing so would deny the company the opportunity to present evidence that the restraints of the agreement are reasonable and necessary to protect its legitimate business interests. The Fairfax County Circuit Court ruled in favor of Malyevac and sustained the demurrer without leave to amend. Assurance Data appealed the ruling.

The Virginia Supreme Court, however, disagreed, saying that the enforceability of non-compete agreements must be determined on a case-by-case basis “balancing the provisions of the contract with the circumstances of the businesses and employees involved.” The court agreed with Assurance Data that, in cases of disputed non-compete agreements, it is the responsibility of the employer to provide evidence that the scope of the agreement is no more than that which is necessary to protect the legitimate business interests of the employer. Such a determination can only be made after considering three elements of the non-compete agreement: 1) how the agreement would restrict the employee’s job functions; 2) the geographic scope of the restriction; and 3) the duration of the restriction.

The ruling is significant for both employers and employees. Although the current court ruling is in favor of the employer, such favor is conditional upon the employer’s ability to provide sufficient evidence that the scope of its non-compete provision was indeed necessary to protect its business interests. Employers may want to take extra care in the future to ensure that their non-compete provisions cover only what is necessary to protect them and no more. The ruling is also significant for employees who may want to take a closer look at their employment agreements before signing.

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This blog has already discussed new litigation and recent cases regarding non-compete agreements. It may already be obvious that more and more of these cases are being decided in favor of the defendants. Another such case has recently had its time in court and, once again, the defendant came out on top.

In the lawsuit, Dr. William Yates went to work for Bosley Medical Group, a hair replacement clinic in Illinois’s Cook County. When he began working for them as an independent contractor in 2005, Dr. Yates had no apparent experience with hair restoration. According to his employment agreement, Bosley was to invest in teaching Dr. Yates the “highly specialized practice of hair restoration”. According to the complaint, Bosley invested more than $200,000 in Yates’s training. In 2012, Dr. Yates went to work for Ziering Medical, a rival hair replacement clinic located in DuPage County.

The crux of the case rested on the matter of geography. Apparently, as it is written, the non-compete agreement could have been interpreted two ways: 1) that the non-compete was limited to Cook County, or 2) that Dr. Yates could not work for a rival of Bosley’s anywhere in the United States, Canada, or Mexico. Paragraph 32 of the non-compete agreement states that, after termination of his employment with Bosley, “[F]or a period of two years thereafter, [Dr. Yates and WDY] shall not directly or indirectly compete with BMG or any of its affiliates … in hair restoration, including but not limited to hair transplantation and scalp reduction and related procedures, within the geographic marketing areas of [Bosley and its affiliates], namely any county (or counties, as defined below), in which [Bosley or its affiliates] then maintains an office.”

In their arguments, the attorneys for Bosley chose the interpretation which focused on counties. Although Dr. Yates was not technically worked in Cook County after he left Bosley, the plaintiffs argued that he was competing for clients in the Chicago area and that Ziering Medical advertises in Cook County. According to Bosley’s argument, advertising in Cook County was sufficient to violate the non-compete agreement. The Court rejected this argument, stating that

“Paragraph 32 of the Agreement does not prohibit Dr. Yates from providing hair restoration services in DuPage County. Bosley is located in Chicago. The Agreement is clear that this bars Dr. Yates from competing with Bosely in Cook County only. … Bosley’s allegation of breach of Paragraph 32 of the Agreement is based solely on advertising by Ziering in the Chicago Tribune and on its website. Such advertisements are not a breach of Paragraph 32.”

When Bosley pointed out that he should have the right to protect his investment in Yates’s training, the Court agreed with him, but only up to a point. In the end, it all came back to geography and the Court determined that the non-compete had not been violated. The Court stated in its Decision that “Bosley does not allege that Dr. Yates has directly or indirectly provided hair restoration services in Cook County. Bosley could have also barred competition in the counties surrounding Cook County as it did for other metropolitan areas where it maintains surgical offices, but did not do so. Bosley also could have barred marketing to prospective customers in Cook County by Dr. Yates, but did not do so by the language of Paragraph 32. Bosley is asking this court to construe Paragraph 32 liberally in favor of restraint but this court is required to construe Paragraph 32 narrowly in favor of natural rights.”

The Court granted the defendants’ motions to dismiss with prejudice.

You can view the full opinion of the court’s decision here
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Non-compete agreements have become fairly common, especially for those working in the technology field. Many companies are afraid that their employees will leave and take trade secrets and/or customers to their competitors. To prevent this from occurring, most employers require their employees to sign non-compete agreements as a condition of employment. Other times employers will sometimes have an employee sign such an agreement after she has already started working for the company, but in certain states, that requires some sort of additional compensation for the employee, such as a bonus, in order to make it binding. A non-compete agreement usually states that an employee will not work for any of the company’s competitors within a certain time frame after their employment with the company has ended. The time frame is generally for a year or two and there is normally a geographical component as well, most often prohibiting the employee from working for a competitor in the same state or county as the company.

Employees often sign these agreements thinking that they have no choice if they want the job. Or maybe they can’t think of a reason they would leave their current employer to work for a competitor. The latter plan might work out just fine for some people but for others, particularly in this economy, all it takes is a downsizing and suddenly these happy employees find themselves without a job and working for a competitor may be their only option.

While more and more courts lately have been siding with the defendants in lawsuits regarding non-compete agreements, many employees are still hesitant to leave their current employer. The idea of a lawsuit can be intimidating, especially knowing that lawsuits can be expensive and the company has much greater resources at their disposal than the employee to devote to fighting a legal battle. It’s also a sensitive area because, when a non-compete agreement is violated, the new employer is often also listed as a defendant. An employee trying to find work will not want to get their new employer in trouble. At the very least, the prospect of getting sued will make them a less desirable candidate to the new employer.

There are ways around these non-compete agreements and discussing options with a non-compete attorney is a great place to start. Many non-compete attorneys will tell you that the first step is always to talk to the current or former employer to see if they can adjust the non-compete agreement to create narrower definitions. Ideally, the result would still protect the employer while giving the employee the freedom she needs to make a living. Many companies aren’t even aware of how their own non-compete agreements are drafted. All they know is that they don’t want their employees to up and leave and take a bunch of the company’s hard-won customers or confidential information with them.

The non-compete agreement is supposed to prevent that but sometimes the agreement has been broadened to a point where it makes it almost impossible for the employee to find work. When working with a company that is at all reasonable, finding a middle ground is may be possible, sometimes with the help of an attorney to assist you. In any case, when trying to get around a non-compete agreement, it is better to be proactive by discussing it with your current or former employer before making a commitment to the new employer. You can also retain an attorney to review the agreement to determine if it is enforceable as sometimes it may be drafted too broadly or there may be a lack of adequate compensation rendering the agreement unenforceable.

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Healix and HHI compete in the business of infusion therapy services: administration of substances such as pharmaceuticals intravenously or by any method other than ingestion. Some medical care providers offer these services to patients in their offices. Healix and HHI provide support.

In 2007 Healix recruited the Clinic as a new customer. The Clinic had two members: Keller, a physician, and Porter, a nurse practitioner. Under their five-year contract, Healix would provide services after the Clinic built an in-office pharmacy and hired staff to work there. The Clinic was responsible for the cost of construction. Healix required Keller and Porter to execute personal guarantees and took a security interest in accounts receivable. Four months after signing the contract, the Clinic notified Healix that it would not fulfill its responsibilities.

The Clinic was in breach, but Healix did not sue. One month later, the Clinic entered into a contract with HHI. Healix learned of the new contract and sued HHI for copyright and trademark infringement and for tortious interference with a contract.

The intellectual property claims were dismissed. After a trial, the district judge rejected the tortious-interference claim. The Seventh Circuit affirmed, finding lack of causation because the evidence indicated that the Clinic would have “walked away” regardless of HHI’s actions.

The Seventh Circuit in addressing the failure to prove fact of damage from the tortious interference held:

In any event, the case can be disposed of on another ground. Keller held a majority membership interest in the Clinic. The district judge assumed that this entitled him to decisionmaking power, and Healix does not dispute this finding. Keller testified that the Clinic would have breached
the Healix contract regardless of HHI’s involvement, be-­‐‑ cause securing financing for the in-­‐‑office pharmacy would have been impossible. The district judge found Keller’s statements to be credible. Healix does not challenge this finding, and it is enough to dispose of Healix’s claim.

You can view the opinion here.

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Many states have been cracking down on employee non-compete agreements lately. California has recently decided that workers who are already employed by a company cannot sign a valid non-compete agreement with that company without some sort of additional compensation. Signature of a non-compete agreement as a condition of getting hired, however, is common practice in the business world. The Illinois Appellate Court though, has just made a new ruling which changes all that.

The case is Fifield v. Premier Dealer Services and it involves an employee who worked for a subsidiary of a company which spun off of the parent company and was acquired by another firm. The employee lost his job as a result of the sale, but was then offered a job if he signed an agreement stating that he would not work for a competitor for two years after leaving the company. Within a few months of accepting the job, the employee quit and went to work for a rival company.

The decision reached by the Illinois Appellate Court was related to precedents in Illinois law that govern what happens when an existing employee is required to sign a non-compete agreement. These precedents state that, in such a situation, a worker who has been employed by the company for at least two years is considered to have received sufficient compensation for entering into a non-compete agreement.

Tony Valiulis, a partner at the Chicago law firm, Much Shelist P.C., which represented the plaintiffs, Eric Fifield and his new employer, Enterprise Financial Group, Inc., successfully argued that the same precedents should apply to newly hired employees.

Despite the fact that states across the country have been growing increasingly strict when it comes to worker non-compete agreements, the new Illinois rule has elements which go beyond what has so far been seen in other states. According to the new rule, even though the non-compete agreement was a condition of getting hired and the employee quit, a minimum of two years of employment is still required in order for the non-compete agreement to be enforceable.
The unanimous decision reached by the Illinois Appellate Court is going to mean a lot of changes to labor law in the state. Many labor lawyers have begun advising their clients to reassess their work agreements and to pay some sort of bonus or additional compensation to prevent their employees going to work for rival companies. “Employers will have to get creative with what they do,” said one Chicago labor attorney. “It can be a signing bonus, a year-end bonus” or another form of compensation.

Many are convinced that such restrictions are harmful to Illinois employers. Joel Rice, a partner at a Chicago law firm, said, “It isn’t a business-friendly rule.”

Others disagree, arguing that non-compete agreements might not be as beneficial for companies as they are commonly believed to be, particularly in sectors which are growing quickly. Massachusetts legislators are currently trying to restrict the use of non-compete agreements. According to P. Andrew Torrez, an attorney in Washington, this is because “tech startups will come to an area with an educated, mobile workforce and having people in that industry tied down makes it less desirable.” It seems that companies fail to consider what they have to gain by the removal of non-compete agreements, rather than what they have to lose.

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Despite the fact that some state laws have been working against non-compete clauses in employee contracts, companies continue to find ways around them. While California has been the least tolerant by banning non-compete clauses altogether, other states, such as Massachusetts, have taken more moderate approaches by seeking merely to limit the scope of such contracts.

Non-compete agreements usually exist as part of a contract between an employee and her employer. The non-compete clause states that the employee will not work for one of the company’s competitors for so many months after termination of her employment with her current employer. Such clauses are usually limited by geography as well as time and the idea is to protect the trade secrets of the employer.

Non-compete clauses are usually included in an employee’s initial contract or (if she doesn’t sign an individual contract) in the employee handbook or manual. If a company wants to change its policy regarding existing employees, then it is subject to the requirement of consideration. This requirement means that both the employer and the employee must gain something from the new or altered contract in order for it to be enforceable in a court of law.

Our Chicago non-compete agreement lawyers observed that in its recent attempt to bypass these new restrictions, Best Buy Co. Inc., (which employs about 5,200 people at its corporate headquarters in Richfield, MN) has offered future stock considerations to hundreds of mid-level executives, including the vice presidents and directors.

These stock considerations are to be in exchange for the executives signing new employment contracts with Best Buy, which include a non-compete clause. The clause prohibits the employees from working for any of Best Buy’s competitors anywhere in the world for 12 months after termination of their employment with Best Buy. By offering something of value to the employees in exchange for signing the new contract, Best Buy gets around the consideration requirement.

If an employee were to dispute this new non-compete clause, most state courts would consider the benefit of the clause to the employer as far as protecting intellectual property, confidential business practices, etc. against the employee’s interests in pursuing other employment. The balance struck between these two will, ideally, result in a determination of the clause’s “reasonableness”. There are two key factors which are normally used to determine reasonableness: time and geography.

While some courts have upheld non-compete clauses which extend for a year or more, Best Buy’s geographical limitation prevents the employee from working for any of Best Buy’s competitors anywhere in the world. This may not meet the requirements for reasonableness as it inordinately benefits Best Buy over the employee.

Another argument an employee could use to challenge the clause is to question whether Best Buy has anything of value to protect. As a retailer, Best Buy does not create anything of its own; it merely resells products made by other companies. Even the services that Best Buy offers, such as installation and repair, are not the kinds of services which typically consist of any kind of confidential information recognized by the courts.

This is just one instance of a company’s response to the changes in law regarding non-compete clauses. No doubt we will see many more before long.

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An appellate court in Louisiana affirmed an order granting partial summary judgment to the defendants in a lawsuit over a purported covenant not to compete. The court held in Elite Coil Tubing Solutions v. Guillory that the plaintiff company failed to meet its evidentiary burden to enforce a non-compete agreement under Louisiana law, which generally disfavors such agreements. In addition to failing to identify specific parishes in which the non-compete agreement should apply, the court held that the plaintiff failed to provide sufficient evidence regarding the nature of the business prohibited by the non-compete agreement.

The plaintiff, Elite Coil Tubing Solutions, LLC, provides oilfield services, with a principal business location in Caddo Parish, Louisiana. The company employed the defendant, Weldon Guillory, as Manager of Operations from June 15, 2006 until Guillory’s resignation on October 15, 2010. It also employed defendant Bobby Gill from July 15, 2008 until his resignation on December 18, 2010.

Guillory signed an employment contract with Elite in 2006, which included a non-compete agreement. That part of the contract provided that, while employed by Elite and for a period of two years afterwards, Guillory would not own or accept employment with a business in direct competition with Elite anywhere within two hundred miles of any of Elite’s business locations. It also provided that, in the event of breach or threatened breach by Guillory, Elite could obtain a temporary injunction without a bond, and that it would be entitled to liquidated damages of $250,000. Gill did not sign an employment contract when he began working for Elite.

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